On December 1, year 2, Floppy Mortgage Co. gave Filp Corp. a $200,000, 12% loan. Filp received proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in sixty monthly installments of $4,450, beginning January 1, year 3. The repayments yield an effective interest rate of 12% at a present value of $200,000 and 13.4% at a present value of $194,000. Floppy does not elect the fair value option for recording the note to Filp. What amount of accrued interest receivable should Floppy include in its December 31, year 2 balance sheet?
Answer : accrued interest receivable should Floppy include in its December 31, year 2 balance sheet =$ 2,166.33
Working notes for above answer are as follow
Rule: Loan origination fees shall be deferred and recognized over the life of the loan as an adjustment of
interest income (similar to the treatment of bond discount amortization).
Face amount of loan$200,000
Nonrefundable loan origination fee (6,000)
Net amount loaned194,000
Effective interest rate (yield) 13.4°/o
Outstanding one month (12/1/Y1 – 12/3 1/Y 1) Interest income for Year1 24,056
x 1/12
$ 2,166.33
